Extending credit gives you an advantage over your competitors and increases sales. While this is very beneficial, especially in the construction industry, it doesn’t come without some risk. Extending credit creates a financial exposure for you, and this may need to be absorbed if things don’t go well. Not everybody to whom you extend credit will always pay on time or, unfortunately, at all. It’s always possible that the job where you extended credit or delivered materials goes into bankruptcy or foreclosure. So, understand when you extend credit, you are taking a big risk. In this article, we will discuss different ways you might secure your rights to get paid, the most important of which will be through personal guarantees.
A personal guaranty is a written promise from an individual to pay the debt of a business. For a personal guaranty to be most effective, it should include the signatures of both husband and wife. This is important because, in Florida, the liabilities of one spouse are not automatically the liabilities of the other.
Here is a practical example. We had a client who supplies windows and doors. Unfortunately, they did not secure their lien rights, but they did have a personal guarantee from the husband/owner of the company. So we filed the lawsuit and obtained a favorable judgment against the husband. We garnished his bank account, and there was ample money there to satisfy the debt. Great, you would think, but unfortunately, the account was held jointly by the husband and his wife in what’s known as tenancy by the entirety. As a result, even though there was enough money in the account and the personal guarantor (the husband) was a joint owner of the account, none of the money – not even half of the money or a portion of the money – was available to satisfy the judgment.
Understand that while a personal guarantee is good and definitely better than not having one, there are limitations in what you can do if you don’t have the spouse on the guarantee as well. So, if you really want to protect yourself, then you need the guarantee of both the husband and the wife.
Also, note that the guarantee should not be conditioned on the business not paying you. You don’t want to be limited in going after the guarantor only if the business doesn’t pay the debt. You don’t want to have to exhaust your remedies against the business before going after the guarantor. You should write the personal guaranty to make it very clear that each of the parties, the company and all of the guarantors, are jointly and severally liable, meaning you could go after the guarantor directly.
Another thing you need to know is that it can include all of the debts incurred even without the guarantor’s consent on the debt. Here is an example of that. We once represented a supply house that had a personal guaranty against a business and one of the partners. The partner sold his interest in the business and left the business but didn’t remove himself from the guaranty. The business continued to accrue debt. When we filed the lawsuit against the business and the guarantor, the partner that left wasn’t let off the hook because he didn’t cancel his guaranty when he left. So be aware of that; just because someone leaves the business doesn’t automatically mean that he is off of the guaranty.
A corporate guaranty is very similar to a personal guaranty. The only difference being that it is given from a business and not from a person. Whenever you request a corporate guaranty, always ensure that the guaranty is from a business better off than the business to which you’re extending the credit.
If the businesses are affiliated and so intertwined that if one fails, they both fail, you may not be getting much additional value. The ideal corporate guarantee is that from a completely separate and financially solvent entity.
Joint Check Agreement
A joint check agreement is a written promise, usually from the general contractor to directly pay a sub-subcontractor or supplier. A joint check agreement is governed by its terms. There is no such thing as a universal joint check agreement. This means that there are some joint check agreements that are really good for you, and there are others that are not so good. You have to read them and negotiate them like you would any other contract.
Most contractor-drafted joint check agreements provide very little protection for you as a supplier or a sub-subcontractor. Take time to draft your own form of joint check agreement and always ensure that your version of the joint check agreement is what is signed. Start negotiating from your form of joint check agreement rather than the general contractor’s form of joint check agreement.
What happens if the joint payee refuses to sign the joint check? A joint check is a dual-payee check. It lists a subcontractor and supply house on the payee line of the check, and unless the counterparty to the joint check is willing to endorse the check, you still don’t have the right to be paid. You can address that issue by requiring the contractor or subcontractor to obtain the joint check, and if the joint payee on the check refuses to sign it then, you can have in the joint check agreement that the contractor upon notice from you will issue a single party check for the amount you are owed.
Sometimes, the joint check payee, as a means to exert leverage on the downstream sub-subcontractor or supply house, may dispute the amount on the check in a bid to get it reduced. So, because their signature is the trigger that releases the funds, they sometimes use it as leverage to effectively renegotiate the deal. You need to be prepared for that in advance and address that in the joint check agreement.
A lien encumbers the property you are working on or provide materials to, and a notice of non-payment or bond claim will encumber the contractor’s payment bond on the project.
You need to send a notice to owner no later than 45 days from your first work. To put it in a much clearer term, the owner or the contractor needs to receive the document no later 45 days. So, you need to send it much sooner than the forty-fifth day. If you put it in the mail on the forty-fifth day, it’s already too late. If you use a notice to owner service, they send it with a manifest stamped at the post office before the fortieth day. With this, the notice is considered good and delivered under the law whether or not the owner or the contractor receives the document.
You need to record your claim of lien or serve your Notice of non-payment no later than 90 days after your last work. Again, the ninetieth is the absolute last day from your last work or last delivery of materials. And it does not include warranty work. I would recommend you start the process at about 60 days after your last work. Give yourself a lot of time to get the paperwork ready, to sign the documents, and to have them served so that you won’t be rushing at the last minute.
Finally, you need to file a lawsuit to foreclose your lien within one year from the recording date of the claim of lien or within one year of your last work on a bond claim. You have a little less time to sue on a bond claim than you do on a lien claim.
Know that subguard is not a protection for you as a subcontractor, sub-subcontractor, or supply house. Subguard protects the owner and the contractor. So if you are working on a job with subguard and the contractor doesn’t have a bond, know that your rights are on the lien that you may assert on the property. Subguard does not protect you. That’s a common misconception. Subguard is an insurance product to protect the owner and the contractor in case a subcontractor can’t finish the job. It is not like a payment bond on the job. So don’t be fooled.
So you can see, the best way to reduce your risk is to obtain that personal guaranty. It can make a significant difference on whether you get paid.